Rum War Between Territories Ferments on Hill

Posted November 16, 2009 at 6:33pm

The bad blood continues to ferment between Puerto Rico and the U.S. Virgin Islands over rum taxes, as the two territories vie for perks to lure the lucrative industry.

In the latest round, the U.S. Virgin Islands is accusing Puerto Rico and its backers of spreading “misinformation— related to a recent move by liquor company Diageo to open a rum plant in the Virgin Islands. Diageo, which owns Captain Morgan, is ending a long-standing relationship with Puerto Rico’s Destilería Serrallés.

In a Nov. 13 letter to House Ways and Means Chairman Charlie Rangel (D-N.Y.), Gov. John deJongh of the Virgin Islands blasted previous communiqués from the Puerto Rican side, namely a letter from Puerto Rico Resident Commissioner Pedro Pierluisi (D).

“I feel compelled to correct the record on misinformation in the letter,— deJongh wrote.

According to deJongh, the “USVI did not lure Diageo away from Puerto Rico.— Instead, he wrote, Puerto Rico was unable to renew a contract with Diageo. An official with the Puerto Rico Federal Affairs Administration did not return a call seeking comment.

Pierluisi has sponsored a bill in Congress that would impose a new cap on the tax revenue that the territories can use to attract rum companies as part of the rum tax “cover over— program. Pierluisi’s bill would consider anything more than 10 percent of the islands’ rum rebate an “unreasonable— subsidy.

But the Virgin Islands’ side argues that Pierluisi’s idea is a bad proposal.

“Under this bill, any excise tax generated by the production of Diageo for Captain Morgan, would go not to the VI government, but to Puerto Rico,— said Peter Hiebert, a partner at Winston & Strawn, who represents the government of the U.S. Virgin Islands. “The self-interest of the proponents of this bill is apparent on its face. The bill would radically transform the nature of the cover-over statute, which forms one of the foundations of the tax relationship between the United States and its territories, for the first time in nearly 100 years.—

In a Nov. 10 letter, Pierluisi and his supporters wrote to Rangel that the Captain Morgan move could cost Puerto Rico as much as $6 billion over 30 years. “This includes the loss of at least 320 rum production jobs,— he wrote.

Pierluisi has said that Puerto Rico uses about 6 percent of its federal rum tax cover-over program money to woo liquor interests, while it uses the vast majority on general economic development programs. “The purpose of the cover-over program is, and has always been, to help the two territories provide for the general welfare of their residents and to promote broad-based economic development,— Pierluisi said in a press statement when he introduced his bill this spring.

But in the USVI governor’s recent letter, deJongh argued that “the campaign to curtail the USVI’s economic development initiatives sets a dangerous precedent for federal involvement in matters between local and state governments and companies. I am not aware of Congress interjecting itself to forbid one state’s economic development initiative or to require off-setting subsidies as compensation.—

That message seems to resonate with Rangel. A Ways and Means spokesman said in an e-mail: “This is an issue for the territories and companies to resolve. The only issue pending before Congress is the extension of current law and I expect that issue will be dealt with in the coming months.—

Even so, neither side appears ready to stand down. Puerto Rico and the U.S. Virgin Islands both spend heavily on K Street. So far this year, Puerto Rico has shelled out more than $800,000 to three lobbying firms: Bryan Cave, Covington & Burling and DLA Piper. The U.S. Virgin Islands this year has spent about $850,000 at Winston & Strawn and Callwood Associates.

“We plan to continue our education efforts to shed light on the misinformation spread by Puerto Rican allies, including the false notion that the USVI lured Diageo from Puerto Rico,— Louis Penn, deJongh’s chief of staff, said in a written statement. “We will ensure Congress understands that this successful public-private partnership will strengthen the USVI’s economy, put our fiscal house in order, grow a historic industry and keep production of Captain Morgan rum in the United States for 30 years.—